Thursday, February 01, 2007


One of the hallmarks of modern economic research has been in the arena of incentives. What makes people do things? How are they motivated? Unsurprisingly, one of the most effective incentives is in the form of cold, hard, cash.

Ever since I heard of the X-prize -- a $10 million prize given to the first individual or group to successfully build and launch a man and the equivalent of 400kg of baggage 60 miles into the atmosphere twice within a two week period -- it has been remarkable to me that more such incentives havent been offered.

Prizes have been awarded in the past for developing consistent, shipboard navigational systems in the 1700s -- and won by a clockmaker. Charles Lindberg flew across the Atlantic to win a monetary prize. Mathematicians spend countless hours attempting to prove obscure, but remarkable, theories in the pursuit of the prestige gained by winning the prizes associated with each theory.

Especially in the economy we currently have, where innovation drives nearly all profit, it would seem plausible that the government would be the first in line to take advantage of such an opportunity.

Take space travel. Estimates for a government sponsored Mars mission range from between $10 billion to $100 billion. But what if instead of pouring in endless monies to the bottomless bureaucracy known as NASA and the International Space Station, the government offered a $1 billion prize to the first private company to build, launch and land a manned mission to Mars? The expiration date could be set 50 years in the future, and the prize indexed to inflation.

While the technology may not yet be available to complete such a task, the resulting innovation in its pursuit would be remarkable. While only one team ultimately won the X-prize, many more tried their best and came up with some pretty revolutionary and inexpensive models. Some are even contemplating going into the space tourism industry against Richard Branson's winning SpaceShipOne entry.

Its like the American Idol effect. While only one person wins every year, usually the top four or five get record deals. These are talents that would otherwise not have been recognized by the record labels for whatever reason. But now they are -- all in the pursuit of a prize.

The New York Times ran an article today about the recent efforts of NetFlix to develop a new predictive analysis tool for recommending movies to their viewers. At first they failed to develop it in house, but once they offered a prize of $1 million with specific requirements, hundreds of ideas began flowing in. Only one will win, but the software developed by individually motivated actors will likely spur on innovations not before imagined.

The federal government could streamline its federal budget by unleashing the creative talents of millions of Americans. What if instead of pouring out tens of billions of dollars in failed bureaucratic attempts to "fix" education, the federal government offered up a $100 million prize to the group that creates a school system readily adaptable to preparing our youth for the onslaught of globalization? They would still expend money to try their methods of red tape, but once someone created a system to eliminate the need for endless funding -- hopefully in the form of more effective funding -- they would pay out the prize and save billions in the long run.

What if instead of a $1 trillion drug entitlement program, we offered $10 billion to the first pharmaceutical company to create a new way of developing cheap drugs? Let them fight, and innovate, all on their own dime. And it may never be achieved. But tinkering and failure often lead to the most unanticipated results.

The Times article mentions the potential role of prizes in developing alternative fuels. It is no surprise that for all the billions expended in ethanol subsidies and Hydrogen cars, nothing has been created. The incentive to think outside the box isnt there. But if the government said, we will pay $1 billion for the first company to develop a viable renewable energy source, I guarantee that the floodgates of ideas would be opened. Some wouldnt pan out. Others would. And some would lead to solutions to problems that have nothing to do with energy Independence.

This isnt to say the government should cut off funding for status quo grants, and focus only on prizes. But it is to say that with both in combination, once the prize is awarded, it may eliminate the need for those endless, oftentimes fruitless grants.

The beauty inherent in prizes is that they do not micromanage a process. They give requirements, but the paths to that end is not preconceived. The money isnt paid unless there is success. The willingness of people to pursue something that is a passion to them in the hope of a one-in-a-million discovery would surprise most bureaucrats. Which is ironic, considering how many people try to win the lottery every day. We are in a singular position with the technology around us to solve seemingly insurmountable problems. Given the chance, unleashed ingenuity is one of the most unpredictable and powerful elements of humanity.

And ultimately, winning the money associated with the prize is far from the final goal of the innovator. SpaceShipOne cost upwards of $20 million to develop for the $10 million prize it received. Along with the cash, it received endless press, a stake in future commercial space travel, and celebrity status among technologists. It has spawned new excitement in discovering outer space, and companies are looking to develop better versions of their creation.

It is costless to have hundreds, even thousands, of government sponsored prizes. If every dollar of Congressional pork-laden earmarks were devoted to such a scheme, the efficiency of government would be astronomical. Again, unless the technology is developed, no prize is given out. And if the technology is developed, it is likely that its development is worth far more than the prize-foundations expenditure anyway.

It would likely disrupt established bureaucracies and insider deals. But the key to ending corruption is to open a system to the light of day -- and no greater light exists than the collective free will of a group of people in pursuit of prestige and a cash prize. I mean honestly, look at the ridiculous lengths people go to to get on game shows. Lets just take advantage of those selfish impulses and translate them into something beneficial for all mankind!